Constating Documents

Constating documents are the instruments that constitute a corporation: what a stranger would need to read to know what the corporation is, which shares it can issue, who manages it and what limits apply. The phrase turns up in loan agreements, legal opinions and closing agendas, usually as a request for "certified copies of the constating documents".

The term is not defined in the Ontario Business Corporations Act (OBCA) or the Canada Business Corporations Act. It does appear in securities law. Ontario's Securities Act defines a private company by reference to its "constating document", and the private issuer exemption in National Instrument 45-106 looks for transfer restrictions "contained in the issuer's constating documents or security holders' agreements", treating the two as different things.

The OBCA uses the same grouping without the label. It repeatedly refers to the articles, the by-laws and a unanimous shareholder agreement as the documents that can displace its default rules; section 116 on making by-laws is one example, and the borrowing power discussed below is another. Section 140 requires every corporation to keep the articles, the by-laws, all amendments and a copy of any unanimous shareholder agreement known to the directors at its registered office or another place in Ontario designated by the directors. Our guide to corporate minute books explains how those records are organized. Federal corporations have the same set: articles, by-laws made under section 103 of the CBCA and any unanimous shareholder agreement under section 146.

The articles of incorporation are the starting point, and articles of amendment are read together with them. Restated articles of incorporation supersede the original articles and all amendments, and after an amalgamation or continuance the articles of amalgamation or continuance are deemed to be the corporation's articles of incorporation. The corporate by-laws hold the administrative rules. A unanimous shareholder agreement is often included because it can restrict the directors' powers and binds later shareholders, as the ranking below explains.

The OBCA's definition of "articles" is broad. It covers original or restated articles of incorporation, articles of amendment, amalgamation, arrangement, continuance, dissolution, reorganization and revival, and older instruments such as letters patent, supplementary letters patent and a special Act. A corporation created decades ago by letters patent therefore has constating documents too; they simply carry an older name.

The word "constitution" belongs mainly to unincorporated associations, clubs and some not-for-profit bodies, whose "constitution and by-laws" do the same job as a contract among members. The OBCA does not use the word at all; for a business corporation, the articles fill that role.

Anyone lending to, buying or investing in a corporation needs three answers that only the constating documents give: whether the corporation can do the deal, who must approve it and who can sign.

Borrowing is the clearest example. Section 184 of the OBCA lets the directors borrow, give guarantees and grant security over the corporation's property without shareholder approval "unless the articles or by-laws of or a unanimous shareholder agreement" provide otherwise. If a unanimous shareholder agreement requires shareholder consent for debt above a threshold, a board resolution alone is not enough. The lender's lawyer cannot confirm the loan was authorized without reading all three.

A typical closing package includes:

• an officer's certificate attaching the articles, by-laws and any unanimous shareholder agreement, each certified as a true and complete copy that is in full force and unamended;
• the resolutions approving the transaction;
• an incumbency certificate with specimen signatures of the signing officers; and
• a recent certificate of status from the registry.

A share buyer runs the same review in due diligence, looking for share classes, transfer restrictions that need consent and shareholder vetoes.

The OBCA's indoor management rule in section 19 stops a corporation from later asserting, against an outsider, that its articles, by-laws or unanimous shareholder agreement were not followed, unless the outsider knew or ought to have known of the problem because of their position with or relationship to the corporation. Section 18 adds that no one is deemed to know a document's contents merely because it was filed or available for inspection. Even so, the rule is a fallback rather than a plan: a lender that has the documents in hand may be found to know what they require, so it reads them and obtains any required approvals before advancing funds.

When these documents conflict, Ontario corporate law applies them in roughly this order:

1. The statute. Mandatory provisions of the OBCA or CBCA override everything below them.
2. The articles. Section 17(2) bars a corporation from exercising its powers in a manner contrary to its articles, and the articles change only by a filed amendment.
3. A unanimous shareholder agreement. Signed by all shareholders, it can restrict the directors' powers to manage the business (section 108(2)), limit the directors' default power to make by-laws (section 116(1)) and bind later shareholders, who are deemed parties to it (section 108). Shareholders who take over directors' powers also take on the matching duties and liabilities.
4. The by-laws. By-laws regulate the business and affairs within the limits the articles and any unanimous shareholder agreement set. A by-law made by the directors takes effect immediately but must go to the next shareholders' meeting, which can confirm, amend or reject it.

An ordinary shareholder agreement sits outside this hierarchy. It is a contract among the shareholders who sign it and does not amend the articles or by-laws. If it conflicts with them, the articles still govern how the corporation acts, and the remedy usually lies in contract between the signatories. That is why well-drafted agreements include a covenant to vote shares as agreed, which section 108(1) expressly permits, and to amend the articles to remove any conflict.

Two practical points follow. First, section 17(3) provides that an act of the corporation is not invalid merely because it is contrary to its articles, by-laws or a unanimous shareholder agreement, so the ranking usually decides remedies and liability rather than whether a transaction stands. Second, draft the articles, by-laws and shareholder agreement together so share classes and approval thresholds match. Lamba Law's shareholder agreement builder produces a first draft to review against your articles.

Ines Carvalho and Delroy Campbell each own 50 of the 100 common shares of Sixteen Mile Stoneworks Ltd., an Oakville countertop fabricator, and both are directors. Their bank offers a $750,000 term loan secured by a general security agreement over all of the company's assets, and the bank's lawyer asks for certified copies of the constating documents.

The articles impose no borrowing limits, and By-law No. 1 lets any two directors sign for the corporation. But the 2021 unanimous shareholder agreement requires the written consent of all shareholders for any borrowing over $250,000, so a directors' resolution alone would not authorize the loan. The lawyer adds a shareholder consent signed by both owners to the closing agenda, and Delroy, as secretary, signs an officer's certificate attaching the articles, the by-law and the agreement, certified as complete and in force. The loan funds on schedule, and the minute book records exactly who approved it.